Relevant Life Insurance and HMRC: What the Rules Actually Say

Relevant life insurance has been HMRC approved since 2006 and the rules around it are well established. But because it’s a specific type of policy with specific qualifying conditions, it’s worth understanding what HMRC actually requires, both to make sure your policy is structured correctly and to understand why the tax treatment works the way it does.

Here’s what you need to know.

What HMRC requires for a policy to qualify

For a policy to be treated as a relevant life insurance policy, and therefore qualify for corporation tax relief on premiums with no Benefit in Kind charge, it needs to meet a set of specific conditions set out in the Income Tax (Earnings and Pensions) Act 2003.

The key conditions are:

• The policy must be a term assurance policy. Relevant life cannot be a whole of life policy – it must run for a fixed term. This is one of the reasons relevant life is structured as it is and why it’s distinct from other types of employer-funded life cover.
• The policy must be taken out by an employer on the life of an employee or director. The company is the policyholder. The person being covered must have an employment relationship with the company – you can’t arrange relevant life cover for someone with no connection to the business.
• The only benefit payable under the policy must be a lump sum on the death of the life assured during the term. The policy must be a pure death benefit, it cannot include income protection, waiver of premium based on the employee’s incapacity, or other added benefits that would take it outside the relevant life framework. This is why critical illness cover cannot be included, it would take the policy outside HMRC’s definition.
• The lump sum must be paid to an individual or to a registered charity. In practice this means the policy is written into a discretionary trust, with the beneficiaries being the director’s family or other nominated individuals. The trust is what ensures the payout reaches the right people tax-efficiently.
• The policy must not be for the benefit of the employer. The entire purpose of the policy is to provide a benefit for the life assured’s family, not to provide a commercial benefit to the business. This distinguishes it from key person insurance, where the payout goes to the company.

The sum assured must not be excessive

HMRC also has a position on the level of cover that can be provided under a relevant life policy. The sum assured should not be excessive relative to the individual’s remuneration and their role within the business.

In practice, insurers and advisers apply this as a matter of course – the cover level offered is based on a multiple of total remuneration, typically up to 25 times, which for most directors represents a very meaningful level of cover without being disproportionate. As long as the policy is arranged through an experienced adviser who understands the framework, this condition is straightforward to satisfy.

What happens if a policy doesn’t qualify

If a policy that was intended to be a relevant life policy doesn’t meet HMRC’s conditions, the tax treatment changes. The premiums may not qualify for corporation tax relief. The director may face a Benefit in Kind charge. And in the worst case, if the policy has been treated incorrectly for a number of years, there could be a retrospective tax liability to address.

This is why the structure matters from day one. A policy arranged incorrectly, even inadvertently, can lose the tax treatment that makes relevant life so efficient. This is one of the clearest reasons why arranging a relevant life policy through a knowledgeable whole-of-market broker is important, not just to get the best premium, but to make sure the policy is structured correctly within HMRC’s framework from the outset.

The trust – why it’s not optional

One of the conditions HMRC requires is that the payout goes to an individual rather than to the employer. In practice this means the policy must be written into a discretionary trust from day one.

Some directors see the trust as an administrative hurdle. In practice it’s handled as part of the application process and adds no meaningful complexity on the director’s end. And the trust does three important things beyond satisfying HMRC’s conditions, it keeps the payout outside the director’s estate for inheritance tax purposes, it ensures the lump sum reaches the family without going through probate, and it keeps the benefit free of income tax for the beneficiaries.

The trust isn’t a complication. It’s one of the most valuable features of the whole arrangement.

Why the rules have stayed stable

Relevant life insurance has been in place since 2006 and the HMRC framework around it has remained consistent. The conditions are clear, the tax treatment is well understood, and the major insurers, Legal & General, Aviva, Zurich, LV= and others, all offer policies that are specifically designed to meet those conditions.

This isn’t a grey area of tax planning. It’s an established, HMRC-approved product with a nearly twenty-year track record. Directors who are cautious about whether the tax treatment is legitimate can point to the specific legislation, the HMRC guidance, and the long track record of the product as evidence that it’s exactly what it appears to be.